Saturday, December 31, 2016

On BBC Radio 4's Today programme this morning presenter Sarah Montague heard some sobering end-of-year views on Brexit, the markets and the outlook for 2017 from economic consultant and commentator George Magnus and venture capitalist Jon Moulton.

George Magnus

Sarah Montague:
The London Stock Market closed at a record high yesterday after rising 14 per cent over the year. The Dow Jones in New York had a bad last day but it also had an excellent year. So what happened to the predictions of doom and gloom in the wake of Brexit and the election of Donald Trump, and what should we read into these buoyant markets? Here in the studio is the economist and author George Magnus and joining us from Guernsey is Jon Moulton, the venture capitalist and founder of Better Capital.
George Magnus – do you want to kick us off – how should we be reading this, both the UK and US markets which have done so well – what do we read into that?

George Magnus:
Yes, I think a little humility is certainly in order in the face of these rather unexpected developments and in the face of political shocks that we've had this year. And it just kind of goes to show that actually the traditional reliance on economic thinking to drive – you know, the way the markets work – actually isn't everything and we are making kind of a big risk, or a big mistake I should say – if we think that this is going to guide us through 2017. But having said that we have to remember at the beginning of the year markets were in terrible shape, they were haemorrhaging all over the world, America and China both looked as though they were going to go down some sort of economic tube and it did all come good. I mean the American economy has kind of snapped an unusually long - five-quarter long - kind of funk of profits in recession and slow growth and of course the markets now are making a huge bet on the predictability of the Trump presidency particularly insofar as fiscal budgetary stimulus is concerned, and tax cuts and so on.

Sarah Montague:
OK. Now as far as you’re concerned Jon Moulton do you see this as a form of vindication - because you were a supporter of Brexit.

Jon Moulton

Jon Moulton:
I still am a supporter of Brexit. Yes, the forecasts for sort of nuclear winter that were put out by the Treasury and Bank of England were manifestly garbage if you bothered trying to read them, so I’m not greatly surprised that things haven’t collapsed terribly. There’s an awful long way to go on Brexit though, I thought I knew a lot about Brexit before we actually got the vote – I’ve realised since I didn’t know that damned much, it’s incredibly complicated and the uncertainties in front of us are really quite daunting.

Caroline Montague:
And so in terms of what we’re reading now this has such a long way to go that it’s not factored anything into the markets.

Jon Moulton:
I think the market doesn't have a clue how to value it. Hard Brexit might be good and it might be bad for the economy, nobody knows.

Caroline Montague:
George Magnus?

George Magnus:
I agree completely. We should remind ourselves that Brexit hasn't happened yet so all we've had really is the referendum and a limited period of huge uncertainty about what Brexit actually means and I dare say that not even the government actually knows what that means at this stage. So as Jon said, it might work out OK, it depends if the government is capable of evolving what I would call a mitigation strategy – can it offset the negatives that we know will happen as a consequence of trade disruption and investment disruption and so on. It’s possible, but so far we don’t really have very much to go on. All we have to go on, which is why the FTSE is so buoyant, is huge depreciation of the pound.

Caroline Montague: Indeed Jon Moulton, because what we’re looking at here is in pound terms it’s up, it’s not such a good position if you’re priced in euros or dollars.

Jon Moulton: No no no, if you’d bought the FTSE in dollars you’d actually be where you started at the end of the year, there was just no growth in it, so to some extent the FTSE, which has a lot of overseas earnings in it, has gained in value from the collapse of Sterling. Going forward though Mr Trump I’m afraid rears his head a lot into how Brexit plays out. He seems very likely not to be a man who’s going to promote free trade. That could very much affect what sort of deals the UK’s actually able to get. All desperately uncertain and Mr Trump is a sort of random variable they don’t know how to take into account.

Caroline Montague:
Are you saying what deal we have with the United States could affect what deal we get with the EU?

Jon Moulton:
Well it could be wider than that, there’s already a bit of deglobalisation, international trade’s not going as strongly as it was, trade walls are being put up a bit but Mr Trump’s talking about very serious trade walls. So instead of talking about conferences where countries get together to cut the barriers to international trade, we may well see countries stacking up trade barriers all over the place which would make it harder for the UK to actually negotiate its own free trade arrangements going forward, or at least its low duty arrangements going forward.

Caroline Montague:
Well it will start being played out in the year ahead. Jon Moulton, George Magnus, thank you very much.